Google Credits Mobile And Video Investments For Strong Revenue Growth

Google parent Alphabet finished out Q2 2016 with $21.5 billion in overall revenue, a 21% jump from Q2 2015. It's also a notable acceleration of growth rate from that year-ago quarter, when top line revenue grew 11%. [Read the earnings release.] The company chalked up the faster growth to investments in mobile and video.

“The strength of the quarter is about mobile,” said Google CEO Sundar Pichai on the earnings call. “Our investment in mobile underlines everything we do,” he said, pointing out that while outsiders view search, Android and machine learning as separate investments, Google views them all as mobile investments.

The quarterly results beat analyst expectations, though many of the structural issues investors noted in Google’s Q1 2016 earnings continued to grow as well.

For instance, traffic acquisition costs (TAC), the amount Google must pay to affiliate networks and media networks to direct users to Google’s properties or to use Google search as a default service, rose $200 million year over year. That rise eats away at Google’s profit.

Alphabet’s “moonshot” business, which it breaks out as “other bets,” more than doubled its aggregate revenue, growing from $74 million a year ago to $185 million. But the operating losses for “other bets” grew from $660 million to $859 million.

Alphabet CFO Ruth Porat attributed the higher operating costs to new sales and engineering hires, also largely driven by mobile.

Google’s aggregate cost per click (CPC), which many analysts see as an important barometer for the health of mobile advertising, is down 7% YOY, but the total number of paid clicks grew by almost 30%.

Google often states that aggregate cost per click declines as ads and user searches move to mobile, where users are more likely to mistakenly click on an ad and less likely to buy. The issue was whether Google could drive clicks (through products like AMP and more refined mobile query responses) or if people would march out of the web and into apps.

“We’ve been going through this mobile transition for four or five years. Have you seen ad budgets and auction dynamics pick up on mobile search?” asked Citi internet analyst Mark May.

“This is a scale business and as people shift to mobile there are second order effects,” answered Pichai, noting that as more consumers use mobile search, the quality of search intent data goes up as well.

For instance, YouTube’s recommendation system is now driven by machine learning, fed by its mobile search data, and the result is more videos watched and longer viewing sessions – which means more money.

Google’s mobile investments “go much deeper than what’s visible on the page,” said Pichai.